A ﬁrm is valued at €6 million and has debt of €2 million outstanding.The ﬁrm has an equity beta of 1.8 and a debt beta of 0.42.The beta of the overall ﬁrm is:

Question

Quizplus · Accepted Answer

Using the formula to calculate beta of the overall firm:

Beta overall = (equity value / firm value) * equity beta + (debt value / firm value) * debt beta * (1 - tax rate)

Substituting the given values,

Equity value = €6 million - €2 million = €4 million

Debt value = €2 million

Tax rate is not given, so we assume it to be 35%.

Beta overall = (4/6) * 1.8 + (2/6) * 0.42 * (1 - 0.35) = 1.34

A ﬁRm Is Valued at €6 Million and Has Debt